The invention disclosed herein relates generally to systems and methods for asset accumulation that combines income insurance and a savings investment.
The failure of the United States' banking system was the catalyst for the Great Depression. Because banks inappropriately invested the deposits of small investors in high-risk corporate loans and securities, deposits were lost when these investments defaulted. The failure of a large number of banks, and in some respects the financial markets in general, resulted in millions of consumers loosing their life savings simultaneously with a period of high unemployment.
To counter these risks, Congress enacted laws to reinstate consumer confidence in the banking system. This led to the creation of the Federal Deposit Insurance Corporation (FDIC). The FDIC guaranteed bank deposits against loss for any reason, up to a predetermined amount. This institutional safety net relieved consumers from the responsibility to evaluate the risks involved with depositing assets with one financial institution as opposed to another. At the same time, Congress enacted barriers between banks and non-bank securities providers. The main purpose of this separation was to isolate banks as a safe place to store and save money, as opposed to ownership of corporate securities that fluctuate in value over time based on market performance. In the realm of securities, investors are required to evaluate the risk of loss versus the potential rate of return on an investment.
In the United States, household wealth is positively correlated to education, occupation, age and gender. Using wealth as the key variable, it is possible to group US households into three homogeneous savings groups. The first group comprises the top twenty percent that own more than eighty percent of the total financial assets. The second group consists of the middle forty to fifty percent of households that own roughly fifteen percent of total assets and over seventy percent of the total outstanding debt. The bottom thirty to forty percent of household own less than five percent of total assets and earn less than $25,000 in annual income. This simple segmentation of US household across wealth reveals a significant asset disparity between the top twenty percent and bottom eighty percent of households.
Although not intentional, government regulations may reinforce this market segmentation. According to SEC rules, investment providers must comply with minimum professional standards, fully disclose product risks, and comply with a code of fiduciary ethics. Commissioned sales professional must collect information from customers regarding their financial goals and capacity, which is used to determine the suitability of an investment for a particular consumer. The sales agent's fiduciary duty requires a sale to be rejected where it contains unacceptable risk for the consumer. Compliance with SEC disclosure rules, suitability, and other criteria creates high fixed costs for investment providers when compared to bank savings products that are FDIC insured. Although banking restrictions have been modernized in recent years, this has not affected the boundaries between FDIC and non-FDIC investment products.
Employer defined contribution plans offer new opportunities to workers by providing a self-directed alternative to equity investment ownership. Defined contribution plans, e.g., 401(k) are retirement savings plans offered mainly by large employers as a retirement savings benefit. Workers make pre-tax contributions, which are automatically deducted from their paychecks, and employers have the option to make matching contributions based on a special formula. Employee participation has increased to about thirty million workers and has become a major source of investment for working households.
Defined contribution plans, however, are confining to the consumer because they depend on an employer/employee relationship and are limited to retirement oriented investment products due to withdrawal limitations before a certain age is achieved. Furthermore, these plans are offered to employees through their employer, but managed by outside investment providers. As a result, employees do not have a direct relationship with the investment provider. This causes employers and providers to limit their communication with employees because of the serious fiduciary liability related to the management of employees' retirement assets.
The traditional model of wealth segmentation has had a negative impact on middle class consumers because of the embedded economic incentives that cause providers to avoid consumers with fewer assets to invest. For example, investment providers tend to provide investment disincentives to low income groups through marketing and sales practices, minimum balance requirements, restring access to funds, commission prices, penalties, etc. Despite the perception that small investors are a growing force in the investment markets, their participation in terms of dollars invested is small. Also, increased levels of indebtedness that has reduced their total net worth have offset much, if not all of this value. Indeed, in the last ten years, approximately ninety percent of equity asset appreciation has accrued to the top twenty percent of US households.
Depending on their personal situation, middle class consumers do not have the means to control the risks of the modern economic environment. Turning to FIG. 1, two graphs are presented that illustrate the changing risks faced by the middle class consumer vis-à-vis income and savings potential. According to the “old economy” economic model 102, as a person ages their value of their total expenses 104 rises to a particular point and begin to decrease in the later years of life. Accordingly, income 106 also increases with age to a point and begins to decrease in later years as a person enters retirement. As is shown in the figure, a person has less opportunity to save earlier in life 108, as expenses typically outstrip income. As an individual's lifetime increases, however, expenses taper off as income continues to increase, thereby providing an opportunity to save 110.
In the new economy 112, typically defined by job insecurity, the value of an individual's total expenses 114 rises to a particular point and then begins to decrease in the later years of life. Unlike in old economy 102, however, job security is tenuous at best with individuals frequently changing employers and income levels 116. Hallmarks of the new economy include lower workplace stability, high risk of involuntary job displacement, lower chance of re-employment with comparable pay, high healthcare costs, and lower employer benefits. Because income is constantly in a state of flux, there is less of an opportunity to save. Indeed, the opportunity to save may present itself and be eliminated before the employee even realizes it. This creates a need for new forms of precautionary income in order to account for these new patterns of behavior.
Because middle class consumers are vulnerable to new and increased risks to their economic well being, present wealth segmentation models are no longer sustainable. Concurrently, employers have transferred risks back to workers, thereby making them fully responsible for their individual financial security. As indicated above, middle class must overcome barriers to participating in the growth of the economy because they pose disadvantages to traditional investment providers. An aging population and deterioration in the value or coverage of employer benefits exacerbate these problems.
There is thus a need for a system and method that allows consumers to safely manage risk, accumulate liquidity, and obtain additional income security protection.